Capital Structure - PowerPoint by BrittanyGibbons

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									Wal-Mart
Capital Structure Analysis


          Gail Bethea
Presentation Outline
   Comparison of key financial ratios
       Strategies for improvement
       Adjusting capital
            Credit, cash, and inventory sources
   Keys to attracting investors
       Trend analysis
       Recommendations to buy or sell
   Cost of capital calculations
       Analysis of methods
       Best approach for Wal-Mart
              Financial Ratios (underperforming)
Liquidity          1/31/04   1/31/03   1/31/02   Liquidity          1/31/04   1/31/03   1/31/02
Ratios                                           Ratios
Wal-Mart                                         Industry
Working             -0.03     -0.02     -0.01    Working             0.21      0.18      0.13
Capital/Total                                    Capital/Total
Assets                                           Assets
Current Ratio       0.92      0.94      1.02     Current Ratio       1.72      1.49      1.61



                    0.21      0.16      0.19                         0.76      0.56      0.51
Quick Ratio                                      Quick Ratio

Interval Measure    11.70     8.60      10.58    Interval Measure    43.54     59.32     31.78
        Financial Ratios (underperforming)
   Net Working Capital to Total Assets Ratio
       Difference between current assets and current
        liabilities.
            Negative performance increases Wal-Mart’s debt.
   Current Ratio
       Current assets divided by current liabilities.
            Below preferred 2:1 ratio.
                  Might be misleading in Wal-Mart’s case.
     Financial Ratios (underperforming)

   Quick Ratio
       Current Assets – inventories divided by
        current liability
            Wal-Mart is dependant upon inventory sales to
             pay debt.
   Interval measure ratio
       Liquid assets relative to company outgoings
            Wal-Mart unable to operate beyond 12 days
             without inventory sales to support.
        Recommendations
   Cash
       Increase the accounts payable period by 20.5%
        or decrease inventory by 25%
            Both recommendations impact vendors/suppliers
                 Optimal choice is to reduce inventory period
                 Avoid increasing debt
       Increase the time it takes for Wal-Mart to pay its
        accounts payable to 45 days instead of 33 days
            May reduce the amount of cash needed for operations
Recommendations
   Marketable Securities
       Predict future cash needs
       Purchase marketable securities
            Mature in one day to one year
                 Evaluate risk as well as time to maturity, penalties
            Allows Wal-Mart to obtain maximum returns
                 Excess cash allowed to earn interest for maximum
                  amount of time
Recommendations
   Inventory
       Markdown to account for shrinkage,
        customer demand, seasonal fluctuations.
            Moves inventory to decrease inventory and
             increase revenue.
                 Markdowns may result in loss, but can then be
                  written off.
Recommendations
   Sources and uses of short term
    financing
       Delay accounts payable
       Obtain unsecured bank loans
       Sell short term debt to investors
       Obtain short term loan from accounts
        receivable
            Expensive due to high interest
       Attracting Investors
                 2004     2003     2002     2001     2000


Price earnings   25.63    29.58    35.06    46.72    42.16
ratio

Earnings per     $2.03    $1.81    $1.49    $1.41    $1.20
share

Dividend yield   0.97%    0.7%     0.7%     0.7%     0.6%


Common stock     $52.02   $53.54   $52.24   $53.26   $50.59
share price
Valuation and Investment
   Price earnings ratio
       Downward trend for past 5 years
            Wal-Mart not meeting expectations, causing
             stock prices to drop
       Should not be used as determining factor
        to sell stock
            High P/E ratio could indicate stock is
             overvalued
Valuation and Investment
   Earnings per share
       portion of a company’s profit dedicated to
        each outstanding share of common stock
            Can be manipulated, so investor beware
   High or low quality
       EPS for Wal-Mart is low quality
            Does not reflect negative operating results and
             overstates the “true” (cash) operating results
Valuation and Investment
   Dividend yield

								
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